Even if you've been to the Canadian Rockies, you've probably never heard of Advantage Energy Income Fund [USA] (NYSE:AAV), a Canadian royalty trust that operates in the oil and natural gas businesses in Alberta, British Columbia, and Saskatchewan. In keeping with my recent picks, I'm highlighting AAV because of its incredible dividend.
Unlike many American companies, AAV pays its dividend on a monthly basis, and the yield right now is a whopping 14%. You probably wouldn't be as happy if you bought this a year ago, when it was trading at nearly $20, as the price has nearly halved and is now trading around $11.
I think this is exactly the time to get in. The stock is close to its five-year low, and with energy prices rising again, I think this one has some room for growth. Indeed, AAV's revenues have been increasing steadily, and in June the company merged with Ketch Resources Trust, another energy company with extensive undeveloped fields that provide real potential for growth in the future.
Merging with Ketch will give AAV a chance to increase its margins as it consolidates various operations and achieves greater economies of scale. This will be a good thing, as AAV's operating income dropped significantly this year; while revenues were up more than 25% over 2005, costs were up too and this put a serious dent in AAV's margins. Nonetheless, management has showed itself ready to continue putting money into the pockets of investors.
If you do decide to invest in this one, keep an eye out for news about the tax implications. The Canadian government is considering a highly controversial bill to increase taxes on trusts like AAV; a companion bill is pending in the U.S. Congress, and it could mean you end up paying 20% taxes instead of the normal 15% for dividends. Nothing is final yet, but be sure to factor that possibility into your considerations.
Type of stock: A Canadian energy company with a dynamite dividend.
Price target: If the dividend bill does go through it may sour investors on the stock, and you may see a dip. But outside of that, it's hard to imagine this stock dropping much lower. If you buy around $11 or less, you should see the stock stay about even at worst, while you makea nice 14% dividend on your investment.